Business/agriculture

Grain pricing strategies: A key to profitable marketing

By Brent Young

Regional Extension specialist

Posted:
06/08/2018 10:42:58 PM MDT

Edward Usset, grain marketing specialist for the Center for Farm Financial Management, University of Minnesota prefers to concentrate his efforts in helping producers become better at marketing their commodities by assisting them in eliminating mistakes. In his presentation titled "Five Common Mistakes in Grain Marketing," Ed outlines the mistakes: reluctance to pre-harvest price crops; failure to understand and track local basis; failure to have an exit strategy; holding old crop grain in storage too long; and using call options to avoid storage costs. I have taken Ed's thoughts and made a couple of minor changes to reflect grain marketing in Northeastern Colorado.

Brent Young Regional Extension specialist

My list of mistakes include: not knowing your cost of production; reluctance to pre-harvest price crops; failure to understand and track local basis; failure to have a pricing strategy; and holding unpriced grain in storage too long. In this article I'll elaborate on mistake number four, failure to have a pricing strategy.

How many of us have missed an opportunity to sell our grain at a profit because we thought the market would go up a nickel and then we would wait to sell, only to watch the market go down 15 cents? A pricing strategy (a component of a marketing plan) allows us to take some of the emotion out of marketing and make decisions based on our cost of production. Pricing strategies can be either price and/or timing driven.

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One common pricing strategy is the step up approach. In this strategy a producer develops a plan to pre-harvest price all of their crop that is guaranteed through revenue protection crop insurance in 5,000 bushel (one standard futures contract) increments, based on date and price. The final part of this plan is to have all of the guaranteed bushels priced by a predetermined date. Let's look at an example of a step-up plan for marketing corn.

In 2018 a grower plans to produce 100,000 bushels of corn (500 acres at 200 bushels per acre). The grower will buy crop insurance to protect production risk, and have 75 percent of the anticipated corn crop (based on actual production history APH) priced before the end of June.

The price and date triggers might look like this (the prices used in this example are for illustration purposes only and do not reflect actual market conditions):

1.Price 15,000 bushels at $3.75 cash price ($4.00 Dec. futures) any time after January 1st.

2.Price 10,000 bushels at $4.05c/$4.35f by March 29

3.Price 15,000 bushels at $4.35c/$4.60f by April 30

4.Price 10,000 bushels at 4.65c/$4.90f by May 29

5.Price 15,000 bushels at $4.95c/$5.20f by June 13

6.Price last 10,000 bushels at $5.25c/$5.50f by June 27

Make no pre-harvest sales if prices are lower than $3.50c/$4.00f.

The goal of this plan is very simple. The producer wanted to have 75% of the anticipated production pre-harvest priced by the end of June. The percentage of the crop to be priced was determined based on the number of bushels guaranteed through crop insurance and would change based on the level of coverage selected and the farm APH.

It is important to note that this plan does not dictate the method used to price the commodity. The producer might use forward contracts, futures, options, other methods, or any combination of methods. This plan allows the grower to choose the method based on cash prices, futures prices, and other factors at the time the commodity is priced.

Utilizing a grain marketing strategy is one way of taking the emotions of greed, hope, and fear out of your marketing decisions. Elimination common marketing mistakes can lead to more profitable grain marketing.

If you have questions about this topic or any other agricultural business management issue, please feel free to contact me at 970-522-7207 or by email at brent.young@colostate.edu

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